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The Dangers of Bond Funds

Dec 12, 2012 3:24 pm ET

By Allan S. Roth

Jason Zweig recently wrote about investors mistaking manager luck for skill. He noted that since the beginning of 2009, investors have poured $1 trillion into bond funds, with about three-quarters going into actively managed funds. Index bond funds, which passively track a designated group of bonds, are out of favor.

Are investors doing the right thing?

One active bond fund I’ve been following for some time is the Oppenheimer Core Bond Fund (OPBCX). Since the beginning of 2009, it’s up an impressive 36%. By comparison, the Vanguard Total Bond index fund (VBTLX) has returned only 27% over that period.

So does that mean the better way to go is to pay someone to pick bonds rather than settling for index returns?

Before we jump to that conclusion, let’s consider the rest of the story. In 2008, the Oppenheimer fund lost 36.2%, while the Vanguard fund earned 5.2%. According to Morningstar, the average actively managed bond fund lost 8% in 2008 – the year that stocks plummeted and investors badly needed bonds to be their shock absorber. Meanwhile, the Barclays Aggregate bond index, the benchmark tracked by the Vanguard fund, also gained 5.2%.